Legal Capital is Out – EEIG is Cool! How the Evaporation of Legal Capital in EU Private Companies might Provide a Revival Opportunity for EEIGs

Chapter 7
Legal Capital is Out – EEIG is Cool! How the Evaporation of Legal Capital in EU Private Companies might Provide a Revival Opportunity for EEIGs

Alessio Bartolacelli


The concept of ‘diffusion’ in company law, and in particular in EU company law, is often related to a more complex system of rule harmonisation and/or to the competition between legal systems. In this chapter a specific form of diffusion will be analysed in terms of both its importance, and the consequences it is believed to lead to.

The diffusion discussed here has had as its main target the reduction of the minimum legal capital required for private companies throughout Europe over the past 10 years. This chapter considers how such a process arose within the traditional Private Limited Companies of the UK, to then diffuse to inform French, Spanish, German, Belgian, Portuguese, Dutch and, lastly, Italian approaches in the regulation of companies.

Competition and Freedom of Establishment: The Legal Framework of EU Company Law, the Role of Fundamental Principles and ECJ Decisions

It is well known that in the European Union each member country maintains law-making competence in company laws; this means that throughout Europe different company models can be found. Nevertheless, several core points of their structures are common, or quite similar: first of all, there is the main division between partnerships (or sociétés de personnes, società di persone, Personengesellschaften, sociedades de personas) and companies (sociétés de capitaux, società di capitali, Kapitalgesellchaften, sociedades de capitales); and, secondly, between public (société anonyme [SA], società per azioni [SPA], sociedad anonima [SA], sociedade anónima [SA], Aktiengesellschaft [AG]) and private companies (société à responsabilité limitée [SARL], società a responsabilità limitata [SRL], sociedad limitada [SL], sociedade por quotas [SQ], Gesellschaft mit beschränkt Haftung [GmbH]). Each national model however, possesses specific features, which are an obvious result of the legal tradition of the country where it was established.

In addition to national authority, from 1968 on, Member States of the former European Economic Community, also witnessed a new, ever increasing law-making competence of the EEC with regard to company law. Such an authority, first as the EEC and now as the European Union, mainly exercised its powers through Directives, legal tools not setting out detailed provisions on a given subject but providing general guidelines (and sometimes even various options among which national lawmakers are free to choose) to be applied by each country within its local legal framework and traditions.1

By these means, in the last 50 years, Europe has acquired several main guidelines for the harmonisation of national company laws. This has included, among other things, the regulation of filing of company documents in Trade Registries, legal capital requirements, annual balance sheets, takeover bids and so on; the scope of the framework, however, has almost always only been focused on public companies, leaving member countries substantially free to regulate the organisation of private ones. This means that, while public companies are, in many ways, very similar throughout the European Union (EU), private ones can be significantly different.2

This situation is extremely interesting from an economic point of view. Small and medium sized enterprises (SMEs) are widespread throughout the EU and represent the main feature of the economies of countries such as Italy, France, Spain and up to a point, even Germany. In the case of SMEs, private companies (or closed corporations) are the preferred way to run business, mainly due to the benefit of limited liability enjoyed by members. Moreover, in the last few years, EU fundamental principles of freedom of establishment and movement within the Union have been strongly reasserted by several significant judgements of the European Court of Justice; the trend started with the Centros case in 19993 and continued with the Überseering (2001),4 Inspire Art (2003),5 Sevic (2005),6 and Cartesio (2008) decisions.7

This trend follows a pathway towards establishing real competition between company models. As public companies are characterised by common features throughout the EU, due to the process of harmonisation, the focus here will be on those company types where competition may be less restricted: that is, basically, private companies.8

In this scenario, different national rules regarding the establishment and the regulation of private companies cease to be a disadvantage, and can be seen as providing opportunity for improved competition.

Where it All Began: The Private Limited Company of the UK

It is no coincidence that almost all the national company law modifications I am going to describe were introduced from 2006 onwards. That year, the Companies Act was enacted in the United Kingdom, providing new rules regarding, among other aspects, the repeal of the prohibition of financial assistance by companies; the simplification of legal capital reduction procedures – that now no longer have to go before a court for approval; the simplification of the procedures if directors avail themselves of the possibility of handling the share capital of the company; and, most important of all from a symbolic point of view, a significant deregulation of the minimum legal capital regime.9

This special situation, entailing a strong Private Limited Company and an enhanced freedom to establish this model in every EU member country, caused an impressive phenomenon of emigration of UK Limited Companies to neighbouring countries; as of August 2005 (and thus even before the modifications entailed by the 2006 Companies Act), indeed, in 2010 more than 27,000 Limited Companies were reported to have their registered offices in Germany alone: the Limited Company had been recognised as the best choice when establishing a new company.10

Continental European lawmakers had to ask themselves, at this point, why UK Limited was better than its comparable domestic solutions such as GmbH, SARL, Limitadas, SRL and so on. Although legal literature has not always been unanimous on this point,11 the answer seems to be that establishing a Limited Company was (and in most cases, still is) cheaper, faster and smarter than using classic domestic solutions. The main features of the UK Private Limited Company are:

a. a minimum legal capital which need be no more than a mere 1 penny;12

b. non-cash contributions are allowed;13

c. there is no obligation to pay cash contributions before registration;

d. setting up the company can be done using standard forms, both for the memorandum of association and articles, provided by Companies House;14

e. there is no need for notarisation, so the costs for setting the company up are lower and the time needed is shorter. Only a simple written statement is required;

f. Companies House offers the possibility of a online incorporation, which can also be a same day incorporation;15

g. the internal structure of the company can be organised very freely; directors can be both natural and legal persons (but at least one legal person director is needed). Shareholder decisions can also be taken via electronic means.

Most of these features were available for private limited companies already prior to the Companies Act of 2006, but the joint effect of the Act and of the ECJ decisions referred to above created the need for the remaining European jurisdictions to find countermeasures to use against the ever increasing number of Limited Companies operating outside the UK.16

Other EU Countries’ Countermeasures

Changes to the General Model (France, Portugal and the Netherlands)

These countermeasures, a sort of ‘answer’ by continental lawmakers to the UK Limited Company option, can be divided into two main groups. On the one hand, some countries decided to change several features of the original model of Limited Companies operating within their borders; on the other hand, other EU members resolved to create new company types (or, better, sub-types) that were thought to be a stronger competitive option. In both cases it is quite clear that the minimum legal capital has been seen by national lawmakers as a possible barrier to entry to the specific market constituted by incorporation within their borders, and almost every solution mirrors such a belief.

Concerning the first kind of solution, general models of private companies were changed in France from 2003 onwards, in Portugal in 2011 and in the Netherlands in 2012.

French sociétés à responsabilité limitée, and Portuguese sociedades por quotas now have a minimum legal capital requirement of just one euro in the case of one-person companies,17 while Dutch besloten vennootschappen (BV) have removed any explicit minimum legal capital requirement, merely ruling that at least one share with voting rights must be held by a party other than the BV itself.18 The French law was modified in this sense in 2003, while the Portuguese one in March 2011. Dutch civil code modifications (so called Flex-BV reform), on the other hand, have only entered into force since October 2012, although they were first approved by the upper House of the Dutch Parliament in December 2009.19 In the French and Portuguese cases provisions relating to capital maintenance have been kept unchanged, so it is possible for general meetings to raise capital (and, if necessary, reduce it) according to the usual rules applicable to those company types. Dutch law, on the other hand, provides creditor protection tools that are different from legal capital and are based on the duty of directors to perform a form of solvency test (distribution and balance sheets test) before approving the distribution of dividends to shareholders, the repayment of shares and the purchase of shares themselves.20

The regime regarding contributions has not been changed in the French SARL or in the Portuguese SQ: in the first case, one can donate cash or provide both in-kind contributions and work or service contributions;21 in the second, only in-kind contributions are allowed, while work or service ones are explicitly prohibited by Art. 202 of Codigo das sociedades comerciais; in Portugal shareholders are now no longer required to deposit cash contributions in a bank, but just to give these to the directors at the time the company is being set up.22 In the Netherlands, legal capital can also be denominated in foreign currency23 and no bank certificate is required for cash contributions. While work and service contributions continue not to be allowed by law, an auditor’s report for in-kind contributions’ valuation is not required.24

These three company types can be established by natural and also legal persons. In 2008 the French law created the possibility of using a standard form to establish a company if it is a one-person company and the only shareholder is also the only director.25 Participation in general meetings via electronic means was also made possible in the same year.26

As far as Portugal is concerned, several reforms in 2005 and 2006 permitted the establishment of companies with a one-day constitution (Empresa na hora)27 and by means of online procedures.28 Apart from the Empresa na hora, there is at the moment in Portuguese company law no hint of further model articles. No mention of these aspects are provided by the Dutch Civil Code, even after the private companies’ reform of 2012 came into force, but such a model is also already believed to be extremely competitive.

The Creation of New Company Sub-types (Spain, Germany and Belgium)

The second group of solutions is perhaps more interesting. New private company sub-types were developed by at least four national lawmakers between 2003 and 2012. This is the case of the sociedad limitada nueva empresa (SLNE) in Spain (2003),29 the Unternehmergesellschaft in Germany (2008),30 the société privée a responsabilité limitée – starter in Belgium (2010)31 and the società a responsabilità limitata semplificata (and a capitale ridotto) in Italy (2012).32

SLNE is a special case and deserves to be dealt with separately. It is the oldest of the new models and seems to be the prototype of entry-level companies (since its name: ‘nueva empresa’ means ‘new enterprise’).33 It is a sub-version of the sociedad limitada34 where, somewhat curiously, no modification to the minimum legal capital requirements has been made. Minimum capital is now 3,000 euros (the same as ‘normal’ sociedad limitada), but there is a cap at 120,000 euros.35 Its main features (as compared to a sociedad limitada) are the possibility of an extremely wide range of objects of the company; a maximum of five shareholders (all natural persons) at the moment of constitution; a register of shareholders is unnecessary; a simplified procedure for internal organisation: in particular shareholders’ meetings can be made via electronic means as well as through conventional arrangements and if there is more than one director, creating a – properly speaking – board of directors is not allowed, due to the complexity of such a system of administration.36

In a similar way to the Limited Company in the UK, standard forms are also provided for the SLNE; although they are still defined as orientativos (indicative), so that shareholders are meant to be free to modify them.37 An incentive not to do so is the possibility of a quicker procedure of incorporation that is reserved to companies using standard form articles.

Finally, since it is defined as a sub-type of the SL, changing from SLNE to the former company model is not subject to the strict rules provided for other types of conversion.38

As far as remaining company types are concerned, all of them opted to lower minimum capital requirements: the Unternehmergesellschaft (UG) in Germany can be set up with a minimum legal capital of just one euro, but even the maximum legal capital must be less than the 25,000 which is the minimum required for its ‘parent’ model: the GmbH.39 The Belgian SPRL-Starter was created in 2010 with the same feature, but with a lower limit, set at 18,50, that is, the minimum capital requirement for the constitution of a ‘normal’ SPRL.40 The limit is even lower in Italian SRLS and SRLCR, where the minimum capital is one euro, while the maximum may only reach 10,000.41 Returning to legal capital, only cash contributions are allowed in UGs and SRLS and SRLCR,42 and they have to be fully paid as of the moment of constitution of the company, while these limitations are not laid down by the Belgian legislature.

Among these company models, only the German UGs can be set up by both natural and legal persons, while the founders of the Italian and Belgian companies may only be natural persons.43 In the case of the Belgian SPRL-Starter, there is also a limit to the number of employees, which cannot be more than five. In all the models considered here, however, a company is allowed to have just a single member from the moment of its constitution.

The pivotal and most interesting point however, is analysing how local models compensate for the almost complete absence of legal capital. Similar solutions have been enacted by both German and Belgian company law, with a more detailed regime for the latter; and in Italy, although the Italian case deserves to be dealt with separately.

In the German UG, the threshold of 25,000 euros has to be reached, but not as legal capital, rather as the company’s overall equity: a part of the annual profits, amounting to 25 per cent has to be kept in the company as a special reserve, called the ‘accumulation reserve’, until this reserve, added to the actual legal capital, will at least amount to the minimum legal capital required for a ‘normal’ GmbH. The ‘accumulation reserve’ may only be used to increase legal capital, or to absorb company deficits before these affect what remains of the legal capital.44

In the Belgian SPRL-Starter, the same measure was adopted, in order to reach, by adding such a reserve to the actual capital, the minimum legal capital threshold required for an SPRL, that is, 18,550 euros.45 In addition to such a provision, other features, starting with the name itself, bear witness to the specific ‘entry level’ hallmark of the SPRL-Starter. First of all there is a dimensional barrier: such a company, after increasing its legal capital above the minimum required for SPRL, has to convert to a ‘normal’ SPRL; if not, the SPRL-Starter

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